The IRS’ Voluntary Classification Settlement Program: A Primer for Businesses

A common strategy that businesses carry out to reduce overhead costs is to instruct their tax accountant to classify employees as independent contractors. By doing this, employers free themselves from the tax responsibilities attached to having an employee.

However, the IRS has drawn clear lines between what it means to be an employee and an independent contractor. And in response to this widespread classification issue, the IRS has been conducting more audits, resulting in hefty penalty fines for small businesses owners if caught.

And though it may seem that the IRS is being harsh, there’s also a softer side to their renewed iron hand. The Voluntary Classification Settlement Program (VCSP) is the IRS’ way of giving employers an opportunity to reclassify workers properly.

Much of the information online about the VCSP can be difficult if you’re not a business tax accountant or advisor. And since it’s important that you get the message, we’ll be looking at the basic elements in this primer.

To start with, why is the VCSP a ‘benefit’? Bottom line, the benefit is in the form of greatly reduced penalties! If you are audited and have not opted for the VCSP – but know that you have misclassified workers – obligations and penalties for all the years in question may have to be paid in full.

Secondly, not every business can participate in the VCSP. The IRS has laid out certain eligibility standards for the VCSP program – which businesses may apply for via Form 8592.

According to the IRS, “A taxpayer must have consistently treated the workers as independent contractors or other nonemployees, and must have filed all required Forms 1099 for the workers to be reclassified under the VCSP for the previous three years to participate.” In addition, employers must also not be under employment tax audit by the IRS to be eligible to participate.

Lastly, once eligible, the VCSP provides businesses the opportunity to start the reclassification process. However, this process is not meant to be undertaken alone by the untrained – since classification standards by the IRS are ridden with intricacies.

So, if you need an Indianapolis tax accountant to help you through the VCSP process, you may reach our firm Marietta CPAs at (317) 216-1040 or send an email by filling out our contact form.  We’d be glad to help you sort through any of your tax issues.


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